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Canada’s Currency Regime: Options and Analysis
GSPP 806 Public Policy AnalysisKathleen McNuttSean McConnachieStudent ID #: 200 270 499April 2
nd
, 2008
 
Policy Issue:
 In light of the subprime mortgage disaster that has almost brought the United States’economic growth to its knees, it has become evident that Canada’s economy is at risk of following suit. An indication that this is already occurring is the presenting strife that is facingmany of Canada’s most predominate industries, such as forestry and manufacturing. Due to theregional nature of these industries it is palpable to suspect that economic regional tensions willcultivate as these industries continue to loss their market footing. Though Canada’sunemployment rate is at a 40 year low, there are strong and founded fears that Canada’s economywill start to run parallel with the US’s economy and slide into a recession resulting inunemployment on a similar scale to that witnessed in the early 1990s. It is also evident thatspecific monetary implications will occur as the inflationary gap is widening among the differenteconomic regions of Canada. This will present problems for the Bank of Canada (BofC) as it willeither have to adjust its policies based on specific regional economic situations, impeding areaswith strong growth projections, or make adjustments based on aggregate data, leaving all areaswith lower then potential growth.Thus it can be noted that Canada’s current currency regime, that of a floating rate, is presenting itself as being unable to accommodate Canada’s diverse economic structure which haslead to the current difficulties with competitiveness that many regional economies areexperiencing. Thus, the goal of any policy is to improve regional economic competitivenesswithin an integrated North American market by maintaining a stable, predictable, andrepresentative currency level.
Recommendations:
 
Based on the analysis provided below, it is recommended that the Department of Finance,along with the BofC, initiates active engagement with provincial governments in the drafting of aregional currency regime structure. In this process, expediency and liquidity will be of the utmost benefit for all participating parties and should be held in mind during open negotiations. It isfully in the capacity of the Department of Finance to initiate and implement such a proposal asdefined in the in the
 Dominion Notes Act.
Also such a movement would not erode the federalgovernment’s ability to move back the afloat or towards a peg/North American Monetary Union(NAMU) if it so chooses. This regional regime structure should be established quickly, but not atthe expense of proper planning and evaluation.The regional structure should be designed in such a way as to insure that the regime isautonomous in its operations away from the partisan influences of the federal government,meaning that the BofC should be provided the authority to oversee its operations. The BofC,however, should work closely with regional governments in accessing the economic conditionsof each region so that it may construct policy that is beneficial for the economies of thoseregions. As is describe below, this task would be conducted by the Canadian Currency Agency(CAA) along with the conducting of monetary policy for each region through the supervision of the BofC’s Board of Directors.
Contextual Analysis:
Canada has witnessed rapid currency appreciation since 2003 that has resulted in theCanadian dollar climaxing with its rise above par in the months of November and December in2007. This appreciation seems to be induced by the rise in world crude oil prices, as both hold astrong correlation with one another. With the continued growth of the crude oil extraction andexporting, most notably in Alberta’s oil sands, these sectors will continue to be a strongcomponent of Canada’s economic mix; making it more reactive to world oil prices. It should also
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